Tuesday, 4 August 2009

Film distribution: how to combat the demise of DVD

I had an interesting (and informal) chat with the VP Sales of a large film distributor yesterday, whose responsibilities cover monetisation of content rights post-theatre. We covered many subjects, but he seemed most concerned by the ongoing decline in the DVD market; where revenues are falling due to lack of demand, BluRay is failing to prop up the market and the industry appears to be suffering from a lack of vision, similar to that which has led to the gross destruction of value in the music rights business.

This is a classic strategic problem and one which cannot be solved simply. I am not, in case it was unclear, an advocate of the cognitive school of strategy! Instead, I thought it'd be fun to lay out how I'd use a hypothesis-based approach to seek and select options for turning around the post-theatre film monetisation business.

To start with, I see four broad value models in this business: "buy-to-own" sales of DVDs; "pay-per-view" either through video-on-demand or rental; subscription TV services (such as Sky Movies) and finally ad-funded free-to-air TV. Although it has little bearing on the pre-analysis part of the exercise, I suspect that the BTO market is in decline, less so PPV and FTA and subscription is more-or-less neutral. I haven't done the research, so these are just educated guesses :).

There are a bunch of big trends in the developed markets that will develop to a greater or lesser extent over the next 5 years. These are (in no particular order): ubiquitous, very fast broadband (24MBit/s+); appearance and penetration of IP-connected domestic TVs; deployment of true-broadband cellular networks; accelerating multi-dimensional competition for distribution and monetisation of content from trad' and non-trad' players.

Based on these trends, I'm going to suggest two big assumptions that need to be tested on the way towards hypotheses. (A1) Market evolution will tend to converge all four of today's value models. (A2) Browser-based delivery will be the dominant distribution method for movies in 5 years.

Finally, a couple of hypotheses that we'd need to test if we were going to look at developing a strategy for this market. (H1) Exclusive self-aggregation is the most value-creating business model for post-theatre movie distribution. (H2) Maximum yield is achieved by an ad-funding business model for the first 30 days of release, subscription on demand for archive with the option to purchase.

A note on H1 - by "exclusive self-aggregation" I mean a model similar to Hulu, by which a group of major studios create a joint venture for distribution of content online and do not sell their content elsewhere. This requires co-operation - as Aesop would have put it: united we stand, divided we fall... H2 is actually not strictly required, but I find hypothesing on value models focusses the mind on how money will actually be made!

To establish whether the validity of these hypotheses, you'd need a well constructed value model. What I'd seek to get from this model is a simple set of assumptions you'd need to believe in, in order for the hypothesis to be true. A well constructed model is also useful as it allows the counterfactual to be examined, as well as helping to establish a picture of the effects of one or more studios not joining such a partnership, whether this is a winner-takes-all market or otherwise and so on.

As always, I hope that was interesting - any comments on the hypotheses, assumptions or anything much appreciated.

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